'Pay-as-you-earn' program to lower some student-loan payments

College students taking out federal loans will soon have a new "pay-as-you-earn" option, a reform from President Barack Obama's administration that will ratchet down the cap on monthly repayments from 15 percent of discretionary income to 10 percent.

Under the plan, which the Department of Education announced last week is being finalized, college graduates' loans could be forgiven after they make 20 years of payments, instead of the standard 25.

Carly Robinson, a former University of Colorado student government leader who is set to graduate in May with a doctoral degree in atmospheric chemistry, said the new program is great news for this generation of college students -- especially those who are considering modest-paying careers.

"This will give flexibility to graduates who are considering lower-paying jobs with the government, or nonprofits," Robinson said.

She said people who enter those fields "give back so much," but some talented graduates may be dissuaded for fear they won't be able to afford their loan repayments.

Robinson, who is considering jobs in atmospheric and environmental policy and planning, said she likely won't qualify for the "pay-as-you-earn" program because she has mostly private loans from her undergraduate years.

To qualify for the pay-as-you-earn program, borrowers must have taken out their first federal student loan after Sept. 30, 2007, and at least one after Sept. 30, 2011.

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The changes in the loan repayment plan could cost the federal government $2.1 billion over the next decade.

Obama first detailed the plan in the 2010 State of the Union, originally saying that the proposal could go into effect by 2014. The timeline has been expedited. The Obama administration estimates that the cap will reduce monthly payments for more than 1.6 million student borrowers.

The administration gives this example: A nurse who earns $45,000 and has $60,000 in federal student loans is now paying $690 a month under the standard repayment plan. The current income-based repayment plan reduces her payment to $358 a month. But the pay-as-you-earn plan would knock it down to $239 a month.

At CU-Boulder, the total number of students in 2011-12 who received federal Stafford loans was 9,413, according to Ofelia Morales, associate director of financial aid.

In April, Obama visited the CU campus to give a policy address at the Coors Events Center about higher education affordability and preventing the interest rate on federal loans from doubling.

Earlier this fall, U.S. Rep. Jared Polis, D-Boulder, visited the CU campus to announce his proposed student-loan legislation -- the "Know Before You Owe Act" -- that would add disclosure requirements for private lenders. About 40 percent of students with private loans have not exhausted the federal loans they are eligible for, according to the Consumer Financial Protection Bureau.

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